Should I fix my home loan?

Many Australians take out home loans in order to realise their property goals and while making the jump from a tenant to a homeowner is a big step, whether people opt for a fixed or variable home loan is another story entirely.

A country-wide debate has borrowers asking themselves the question, “Is it time to fix?”

Pro: You want certainty

With the Commonwealth Bank of Australian (CBA), National Australia Bank (NAB) and Westpac dropping their five year fixed rate home loans to 4.99 percent and ANZ reducing its equivalent loan to 5.49 percent – these historically low fixed-rates are nothing to be shy about.

Gai McGrath, Westpac‘s general manager of Retail Banking explained that affordable fixed-rate mortgages are particularly appealing to customers looking to secure their repayment amount over the long term.

If you’re starting out on the home loan journey, locking a long-term competitive interest rate could be a smart move. You’ll have a clear idea of your fortnightly or monthly payments for the fixed term of your loan, which makes budgeting easier.

Pro: You’re protected against cash rate fluctuations

By locking in a fixed interest rate, those with home loans can protect themselves from rate rises that may occur in the future. One big influence on lenders’ mortgage rates is the Reserve Bank of Australia’s official cash rate.

At the beginning of July, Glenn Stevens, RBA Governor, noted that the cash rate may remain stable for some time.

“On present indications, the most prudent course is likely to be a period of stability in interest rates.”

Despite indications suggesting rate stability, if the cash rate did lift, lenders could well respond by increasing their variable-rate loans too. By having a fixed rate mortgage, you’ll be protected against such changes for the duration of your agreed fixed term.

But beware – if the cash rate drops, borrowers with fixed rate home loans won’t reap the benefits.

Con: Know the revert interest rates

Fixed interest rates are usually offered for a period of one to five years. After the fixed rate period ends your home loan will automatically revert to the lender’s variable interest rate. Unless, you choose to fix your rate again – but this could be at a much higher rate than previously.

Either way, at the end of the term you will be changing interest rates so it’s imperative that do your research and know what your lenders revert interest rate is – so you aren’t left with a nasty surprise at the end of your loan term.

Con: Less flexibility

Individuals who get a pay rise, a bonus or inherit some money may wish to put these extra funds towards paying off their home loans but may not be able to if they are locked into a fixed loan.

Some fixed-term home loans restrict the ability to make extra repayments. You may not be able to make such payments, or have to pay a fee to do so.

Likewise, there are often restrictions on paying the loan off before the stipulated term.

“The interest rate is only one part of the overall home loan equation – so make sure you look at the fees, charges, repayment options and the terms and conditions,” Parsons said.

“Fixed rate loan terms are less flexible than variable, which means in most cases you can’t make extra repayments or pay off your loan earlier – if you do so it could be at a cost – whereas, extra repayments paid on a variable rate loan could save you thousands and cut years off your loan term.”

You should look at both their short and long-term circumstances, compare a range of home loan options and look at the pros and cons of fixing before taking up one, or the other.

Can’t decide? Split it!

If you are stuck on the fence trying to decide which mortgage route is the safest and best for you financially, why not consider covering all bases by splitting your loan?

Most banks and lenders will allow you to split your loan so that you can pick up some of the pros and cons of both loan options.

Still undecided? Let the figures do the talking.

RateCity crunched the numbers and data showed that moving from the average variable rate to a 5 year fixed rate at 4.99 percent could save borrowers $51 per month on a $300,000, or $3060 over the course of five years, excluding fees and charges.

Carry out a home loan comparison and calculate your repayments to establish which loan type is best for your needs.  

Five quick tips to consider before fixing

• Fixing can be an attractive option for borrowers because it offers repayment security, making it easier to budget.
• But they aren’t as flexible, which can be a drawback for some, and some lenders make it harder to make extra repayments as a way of building a repayment buffer. And others charge big fees for exiting the loan before the end of the fixed term.
• Another key area to watch out for is the interest rate to which fixed loans revert once the set period is over.
• Most fixed rates revert to a variable rate option at the end of the fixed period, which depending on the rate cycle, could be more than 1 percentage point higher and can mean having to fork out thousands of dollars more per year to service the same loan.
• Borrowers should prepare for the eventuality of higher interest rates in the future and make sure they could comfortably afford to service the loan if rates increased to the historical average of around 7 percent or even higher.

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